The German financial institutions are attacking the ECB’s negative interest rate policy. But according to a Bundesbank analysis, the consequences for commercial banks are not that bad.
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(Foto: picture alliance / Foto Huebner)
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Frankfurt German banks have been complaining about negative interest rates in the euro zone for years. But according to an analysis by the Bundesbank, the financial industry’s complaints are excessive. Accordingly, the earnings situation of the financial institutions had not deteriorated due to the monetary policy of the European Central Bank (ECB) until the outbreak of the corona crisis.
The negative interest rates ensure that the interest margins of the financial institutions in the lending and deposit business decrease. “However, the falling interest margins were not accompanied by a deterioration in bank profitability,” writes the Bundesbank in its current monthly report. The ECB penalty interest rate does not automatically lead to lower bank profits.
On the one hand, negative interest rates are putting pressure on margins, and the payments for the ECB’s penalty interest are also putting a strain on the earnings situation of the institutes. On the other hand, according to the Bundesbank, the banks and savings banks benefit from the fact that they have expanded their lending business and the risk provisioning was very low until the corona crisis.
The central bank also regards this as a consequence of the negative interest rates. The negative interest rate policy is helping to stimulate credit demand, according to the monthly report. The Bundesbank also points to the good economic development, which leads to insufficient risk provisioning in the lending business.
In the corona crisis, however, the effect of the ECB penalty interest rate could be reversed according to the Bundesbank analysis. The bottom line is that it threatens to burden the commercial banks. According to the Bundesbank, the economic downturn will increasingly depress banks’ earnings.
Intense discussion in Germany
Even if hardly any loans have defaulted so far, many financial institutions have already increased their risk provisions in the first and second quarters, according to the Bundesbank. “In this environment, the pressure on margins in the lending and deposit business will also be more difficult to compensate for the banks.” This increases the likelihood that the negative interest rate will “have an inhibiting effect on lending”. In addition, the margins in the lending business are likely to continue to decline over time because older, higher-interest loans are gradually being phased out.
The European Central Bank (ECB) is the subject of heated debate, especially in Germany. The ECB introduced negative interest rates in June 2014, initially at 0.1 percent. Just over a year ago, the central bank increased the penalty interest rate for short-term deposits by financial institutions to 0.5 percent; it applies above a certain tax exemption. The aim of the ECB is to encourage financial institutions to issue as much credit as possible to businesses and consumers in order to stimulate investment and other spending.
According to calculations by the private banking association BdB, the German financial institutions will have to pay around 2.6 billion euros in penalty interest to the ECB this year, around 13 percent more than in 2019. From the banks’ point of view, negative interest rates are a significant burden. BdB President Hans-Walter Peters said a few days ago that the profitability of German banks in particular was suffering from the negative interest rates – and has been since 2014.
Peters went on to explain that negative interest rates would reduce banks’ ability to lend for a long period of time. “The expansionary impetus of monetary policy is slowed down, its real concern thwarted.” It is precisely this criticism that the Bundesbank slows down with its analysis.
Banks are granting significantly more loans
The Bundesbank found that the commercial banks expanded their lending business significantly with the start of the ECB negative interest rate. The developments as a result of the ECB’s penalty interest rate were “largely in line with the monetary policy intention”. Both the banks’ willingness to lend and the demand for credit have been supported by the expansionary monetary policy.
There is one main reason why the interest margin in the lending and deposit business has fallen: While lending rates have fallen continuously since June 2014, the aggregate deposit rate is still positive. This means that the deposits of the bank customers still bear positive interest overall – at least minimally. The average interest rate on private deposits was recently a mean (median) of 0.01 percent, determined the Bundesbank.
This value has been negative for companies since the end of 2016. Most financial institutions pass the ECB penalty rate on to corporate customers with high deposits, but the majority of private customers do not dare to. Instead, many financial institutions have increased their fees for checking accounts, for example.
At the same time, more and more banks may charge negative interest rates for private current and overnight accounts. According to the consumer portal Biallo, their number has now risen to 214 – 20 more than at the end of September. Just over a year ago, at the end of July 2019, only 30 financial institutions charged negative interest rates for high deposits from private customers – often referred to by the banks as “custody fees”. 1300 financial institutions were examined.
Credit institutions are not allowed to simply jerk off negative interest rates, but only with the consent of existing customers or for new accounts. Therefore, some banks charge penalty interest on large amounts of wealthy customers if they have agreed to this. Or the money houses charge new accounts with negative interest.
More: This is how savers successfully defend themselves against penalty interest on the account
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